What Doesnt Change Talking About Inherent Characteristics of the Market ~ forex trading is easy

12:07 AM in about, change, characteristics, doesnt, ebook, Forex, future, holds, inherent, market, my, of, talking, the, what

Perhaps one of the most important questions you can ask yourself when you start using automated trading systems is : how will I survive in the long term ? This is one of the most common inquiries made by traders new to the field since it seems to be evident that the market is an ever-changing beast that does not allow the mechanical exploitation of any inefficiency for too long. New traders often experience this when they first begin to use automated trading systems. Their systems do very well, then fail or they never do well at all. Besides the fact that many of these systems dont have adequate evaluation- leading with inadequate and unrealistic expectations to long term loses - traders almost never ask themselves : what doesnt change ? It is obvious that if you want to exploit a given characteristic of the market for long term profitability you have to look for characteristics of the market that remain constant as a function of time. But are there any ? On todays post I want to share with you my view about market changes and why - even though the market changes- some characteristics of the market remain constant.

When you start to trade the market seems like an invincible beast that behaves in a very unpredictable manner. I remember that the first few months I traded I used to think "I got it" only to discover that the market would rip my strategy apart the next few months. I used to behave erratically - like most new traders behave- modifying my strategy every week in a desperate attempt to "adapt" to changes in market conditions. Of course, my focus at that moment wasnt the understanding of market inefficiencies but the massive multiplication of my money from 500 USD to a few million in a few years.

It wasnt until much later that I decided to stop my journey and build an understanding. If I ever was going to make money from this seemingly chaotic thing, I would need to find the "science" behind it. It became important for me to understand how the market behaved, what changed, what didnt and what strategies could be built that would most likely work for the next 20-40 years. I needed strategies that could work for long enough to build myself a decent income and NOT strategies that would put my capital into excessive risk or work for a year and then wipe my account.
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The question becomes : what doesnt change ? After reading a lot of books and watching market behavior for many months, I started to realize that the only thing that doesnt change in the market, is the specie trading it. The market is traded by humans and therefore any aspect of the market imprinted with human behavior should remain fairly constant. As many traders have discovered I started to see that - although individual human behavior is very different - crowd behavior doesnt change very much. I then read a few papers on game theory experiments applied to economics on groups of people across very different cultures and the results started to match up as the groups became bigger. I then realized that - what doesnt change - is simply the way in which crowds react to price action.

How do crowds react to price action ? You see manifestations of this everyday - not only in the form of market trends - but in the form of long term reversal and continuation patterns, support and resistance levels, etc. There are some characteristics of the market that simply do not change, characteristics which have appeared time and time again during the past 30 or 40 years. Evidence of this is present on almost all market instruments from the GBP/USD, to gold, to the DOW index. However you will notice when you do a close analysis that - even though these objects are ever-present within market instruments - their AMPLITUDE and LENGTH changes as time evolves. A trend that may have been only 200 pips long in 2004 can be 1000 pips in 2010 and the reason why this happens is related with the markets trading volume.
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As time evolves and there are more people in the world, the amount of money being moved in the markets becomes larger and therefore the extent of inherent characteristics of the market caused by crowd behavior also become larger. Through different market conditions, there may be larger or smaller movements of money, causing overall changes in the extent of market moves that appear like "large changes in market behavior" but that are no more than the same old characteristics viewed under the looking glass of a different volatility. For this reason, the key - I believe- to the exploitation of long term market inefficiencies seems to be the use of an inherent market characteristics that changes only with market volatility. Trends are a perfect example of this fact and there are many examples of successful trend following systems that achieve their long term profitability through adaptive criteria based on market volatility.

If you would like to learn more about automated trading systems and how you can build your own likely long term profitable systems with sound risk and profit targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Liquidity in Forex Part No 1 What it Means and Why it is Important ~ forex trading game app

3:54 PM in 1, and, characteristics, evaluating, forex, important, in, is, it, liquidity, means, no, part, quality, systems, trading, what, why

The term "liquidity" is used a lot in trading and finances since it is a vital aspect of market behavior. However, people often use this term very liberally in forex trading often without understanding its exact meaning and the implications of high or low values of this particular property. On this article I want to explain to you what the term "liquidity" is, what it exactly means, its implications within a given instrument and why it is such an important characteristic of the market.

Imagine that we had 20 people standing on a circle with 19 of them holding empty glasses and one of them holding a glass full of water. Now we want to see how much time it will take for the person with the glass to pour it onto the next one and so on until the water reaches him/her again. What we find is that it takes a long time for the water to be exchanged along the full circle because only 2 players are able to participate (the one holding and the one receiving) while all the others have to stay on the sidelines, waiting for their glass of water. Now imagine that we give half of them a glass of water, the process is much faster since the number of active participants has now increased to include everyone, all the people are actually exchanging water all the time.
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Liquidity on the market is nothing else than the "water" in the above example, it is the amount of volume exchanged of a given instrument over a given amount of time. When there is high liquidity there is a lot of volume being exchanged and when there is low liquidity there is little volume being exchanged. When we have a lot of volume people can get in and out of the market easily (since there is always a buyer for every seller and vice versa) while when there is low liquidity the market gets "stuck" as people have to fight to get in or out of their positions. When there is low liquidity you also get harsher price movements since a person holding a position may be forced to drastically change the offering price to match what the other end - which is very scarce - wants. So while under high liquidity exchanges are easy and swift, under low liquidity prices move more erratically since the offered and accepted prices tend to have larger gaps between them. The consequences for the little trader are unpredictability and spread widening while for the large players the consequences are mainly not being able to get in or out of positions due to the lack of available exchange capacity.

Liquidity in the forex market is extremely difficult to read and study since the market has no central exchange but it is handled over a wide variety of banks worldwide in an over-the-counter manner. The volume of a given contract that has been exchanged during a certain period of time therefore becomes hard to read since it depends on the particular provider you are talking about. Even though the market is praised as being extremely liquid and huge, the fact is that this is only be true if you can access to all - or a lot - of liquidity providers (banks). If you limit yourself to just a few you will see that the liquidity you have access to is nowhere near the trillions of dollars people talk about.

When we are going to trade the foreign exchange market, knowing the liquidity levels of the instruments we want to trade is important since currency pairs with higher liquidity tend to be "easier to trade" since they show more inefficiencies characteristic of crowd behavior while instruments with low liquidity tend to show a more random walk much more characteristic of individual investor behavior. Therefore, instruments that are very liquid tend to be easier to exploit using mechanical trading systems while those that dont tend to be much harder to trade. However, as the time frames get bigger liquidity starts to become a less important factor and crowd-based inefficiencies still arise. This is the main reason why you should look for strategies based on larger time frames and longer period indicators when attempting to design systems for illiquid instruments.

On tomorrows post I will discuss the inner aspects of liquidity in the forex market a little bit more, I will discuss some of the currently available literature about the subject in economics and the liquidity characteristics of different currency pairs. If you however would like to learn more about automated trading and how you too can start designing and programming your own systems based on realistic and sound strategies please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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Evaluating Trading Systems Characteristics and Quality ~ forex trading games online

4:16 PM in a, and, bit, characteristics, coming, ebook, evaluating, Forex, little, new, o, quality, restructuring, soon, systems, trading, update

The evaluation of trading strategies is certainly one of the most necessary processes in the trading of mechanical manual or automated systems. The value of evaluation is great since it allows traders to loose their irrational fear and greed emotions and gain a true understanding about the characteristics of the trading system they intend to trade. Part of the evaluation of trading systems involves the judging of different quality parameters to distinguish what makes a system better and what makes it worse, a process which although seemingly intuitive is not so straightforward. Adequate knowledge about the information pertaining to each parameter of the test and what it conveys the user is necessary to know what its consequences actually are in real trading and what their power is from a comparative standpoint. On todays post I am going to talk about how to look at a systems characteristics and what you should be looking for to judge the quality of a given strategy.

New traders are often confused when it comes to the evaluation of trading strategies something which is not surprising if you take into account the whole amount of information which can be derived for a given system. People new to trading first seem to focus on the absolute values of the profit and maximum draw down percentages but judging the quality of a trading system merely by looking at these two values without prior experience is very hard. It is also true that judging a system just through one of these two values is misleading in the sense that it doesnt represent a good overall picture of the strategys characteristics. For example, saying that a system makes 100% a year does not make any sense if the actual potential draw down is not known and even if it is, other characteristics need to be taken into account.

The most simple way to compare a trading system to another effectively is to use ratios of profit and draw down variables. The profit factor, which compares the gross profit against the gross losses of a strategy is an initial measure of system quality. However, although this type of ratios do give us some information about the past risk to reward long term expectation (especially when evaluated over 10 year periods) they do not talk a lot about the problems the strategy would run into with increases in future risk. For this reason I believe that although these ratios are useful to some extent to compare simulations they do not fully represent the inherent market exposure of the system in a way in which a true comparison is made.

System quality - without a doubt - needs to include an analysis of increases in risk over the projected values achieved in simulations to know the true problems that the user may be running into if - for example - risk in the future increases or the estimation of profit and draw down targets is not accurate. For this reason it seems better to evaluate strategies based on projections of increased risk to know the true quality of the system and how dependent it may be on small glitches in simulations.

In this case our best shot at accurate quality comparisons seems to be the average compounded yearly profit to worst case scenario ratio in which the average yearly profit (over a 10 year period) is compared to twice the maximum draw down of the strategy (worst case ratio). To add more meaning to this increased risk comparison a careful user might also want to test the average compounded yearly profit to double consecutive loses after maximum draw down ratio (worst streak ratio). In this ratio, the average compounded yearly profit is compared to the maximum draw down percentage plus a string of loses equal to twice the number of maximum consecutive losing trades. The idea here is to get an idea about the robustness of the strategy and how bad things can turn before a bad scenario is bound to happen.

Systems that are very sensitive to small changes in the number of consecutive loses will give very unfavorable ratios in both cases while systems that have less dependency on individual trades will get better results. This way of evaluating strategies eliminates by default a lot of systems that use unsound trading tactics such as martingales and systems with very bad risk to reward ratios due to the fact that this ratio comparison makes them show their flaws if increases in risk are presented. One thing all traders should understand is that in the future the risk of any given strategy is bound to increase to some extent and having systems that are able to handle this risk increase is not only vital but necessary for successful long term trading.

The above evaluation criteria also allows you to use systems that dont need to wipe accounts to demonstrate that the market has become too risky for them. For example, a strategy with a worst case ratio of 1:2 targeting a 20% yearly profit may be stopped from trading at a 40% draw down while a system that has a 1:5 ratio in the same situation would end up killing the account before we realize it has become to risky. It is also important here to note that sound systems will have a "worst case ratio" better or only slightly worse than their "worst streak ratio" while systems that use unsound techniques -which will be sensitive to small increases in consecutive loses - will have a much worse "worst streak ratio".

In summary my advice is that you focus on the profit to draw down ratios when evaluating trading strategies but -most importantly - that you evaluate ratios in which the maximum draw down and maximum number of consecutive loses are increased so that you get a true idea about your systems robustness. If you would like to learn more about automated trading and how you too can start designing your own likely long term profitable systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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